Many investors are socking their retirement savings away in cash amid fear of the turmoil in financial markets.
But that’s not a strategy that will pay off, says Robert Kapito, president and founder of BlackRock. He recommends investing in junk bonds, dividend stocks and municipal bonds instead.
“There’s a lot of savings sitting on the sidelines, and at today’s interest rates, those savings are not going to last until retirement,” Kapito tells CNBC. “There’s a cost to cash.”
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
Indeed, even 10-year Treasurys provide a negative real rate of return, with their yield at 1.8 percent and inflation running at 2 percent.
As for junk bonds, they offer 90 percent of equities’ returns with only 60 percent of their risk, Kapito says.
“We like high-yield because companies have been the beneficiaries of low interest rates. Their balance sheets look really good, and they’re offering good yields.”
When it comes to dividend stocks, Kapito likes large-cap companies with solid product line-ups that offer attractive dividends and buy back their stock, such as Verizon and AT&T.
As for munis, Kapito favors infrastructure and transportation issues.
His recommendations certainly are backed up by the outperformance of all three categories since the financial crisis ended 3 ½ years ago.
But given that huge run-up, investors might want to be careful about diving in right now. Perhaps this isn’t the worst time to be a bit cash heavy, and then you can invest in those three areas during corrections.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
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